Archive for Sunday, October 19, 2008

Retailers seeking growth in ‘smaller’ Chinese cities

October 19, 2008

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Customers leave a Wal-mart supercenter June 20 in Loudi, Hunan Province, China. Maoming, Wuhu and Loudi are Chinese cities so far in the boonies that the popular Lonely Planet travel guide doesn't even mention them, but retailers are seeking opportunities for growth there.

Customers leave a Wal-mart supercenter June 20 in Loudi, Hunan Province, China. Maoming, Wuhu and Loudi are Chinese cities so far in the boonies that the popular Lonely Planet travel guide doesn't even mention them, but retailers are seeking opportunities for growth there.

— Maoming, Wuhu and Loudi.

They're Chinese cities so far in the boonies that Lonely Planet doesn't even bother to mention them in its popular travel guide. But Wal-Mart has found them, as the company makes an aggressive push into China's smaller markets.

China's economic growth is rapidly spreading out from the main cities like Beijing and Shanghai into the hinterlands, where the middle class is taking off. In a report last year, the consulting firm A.T. Kearney said 75 percent of the middle market is expected to be in tier-two and tier-three cities by 2017.

These cities are "small" only by the standards of a country with 1.3 billion people. For example, Wuhu in eastern China has 2.3 million people and Maoming in the south has 6.8 million, providing a strong consumer base as incomes rise.

In response, retailers are pushing into the hinterlands, including American coffee chain Starbucks Corp. and French store Carrefour SA. Carrefour, the world's second-largest retailer after Wal-Mart, is the largest foreign retailer in China.

Faced with saturated markets at home, these retailers are increasingly looking to emerging economies such as China to drive sales growth. Wal-Mart's attempt to gain a bigger foothold in China is anchored in smaller cities: Only three of the 30 outlets Wal-Mart Stores Inc. opened in China last year were in Shanghai, Beijing and Shenzhen. The rest were in provincial capitals or other cities.

"I think the capacity for growth in China might exceed that of the U.S., if you look at it in the long term," Terrence Cullen, Wal-Mart's vice president of development in China, said in an interview in his office in Shenzhen, the southern boomtown across the border from Hong Kong.

Wal-Mart said its China sales rose 32.2 percent in the second quarter, while international sales overall were up 16.9 percent.

But experts warn there are risks in smaller markets. People are not as well-off, so it's harder to turn a profit. Local suppliers may be less reliable, a concern in a country plagued by quality scandals, including the recent discovery of contaminated baby formula blamed for killing four infants and making thousands sick.

Moreover, the big-bang growth strategy - opening stores across China - requires a bigger investment than the gradual expansion the company pursued in the U.S.

Two of the newest stores are in Loudi (pronounced lou-DEE), a steel and mining town of 4 million people in central China. It's just down the road from Shaoshan, the birthplace of late leader Mao Zedong - who would likely be horrified to hear that a flagship of American capitalism has moved into his neighborhood.

At one of the new Loudi Wal-Marts, a woman in blue overalls greets shoppers. The sprawling, brightly lit and spotlessly clean store has the same general look and feel of one of the company's well-stocked, wide-aisled stores in the U.S.

But a few steps inside, it becomes clear that Wal-Mart is trying to deliver everyday low prices with Chinese characteristics.

The smoky scent of thick slabs of dried smoked pork piled high in a display case mixes with that of laundry detergent and plastic. There are foreign brands: Raid roach killer, Head & Shoulders shampoo, Budweiser beer and "pesto Italiano" flavored Pringles potato chips. But there are also bins of reddish-brown dried squid and vacuum-packed packages of preserved Wuchang fish, one of Mao's favorites.

"I come here all the time," said Chen Yatian, a 21-year-old engineering student. "The prices aren't higher than the small shops outside, and I think the quality is better. My friends and I buy all our snacks here, things like spicy dried tofu."

The need to satisfy sharply different regional tastes is one of the challenges Wal-Mart faces in smaller markets, said Dean Xu, professor of strategy and international business at the University of Hong Kong. Wal-Mart will have to source many goods from local suppliers, potentially raising quality issues. "If there is one incident, it can ruin your company's reputation," Xu said.

Still, Wal-Mart's Cullen says the expansion is a logical step as China's middle class swells and the economy becomes driven more by consumers than exports. Major markets have their drawbacks too, he added.

"The big cities are very difficult to do business in for all the obvious reasons: They're crowded. It's difficult to find real estate. It's expensive and there's competition," said Cullen, who previously helped rival Costco Wholesale Corp. break into South Korea and Taiwan.

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